US 10-Year Treasury Yield Nears 4%, Dollar Index Falls
Amidst an expectation-driven decline in the United States (US) dollar index, the yield on the 10-year Treasury note, seen as a proxy for global borrowing costs, consolidated around 4%.
According to traders, the level is the highest in three months, as a batch of hot economic data strengthened expectations that the Federal Reserve will raise interest rates to a higher level and keep them restrictive for longer.
Signs of persistent inflation and a still-tight labour market forced investors to reverse their views on the likely future path of interest rate rises, now pricing at least three more 25 basis point rate hikes this year and betting that interest rates will peak around 5.5% by June.
Money markets also see the European Central Bank raising rates until at least February 2024, with a fully priced 4% ECB terminal rate.
US Dollar rally on Hold
The dollar eased on Wednesday after China’s manufacturing activity expanded at its fastest pace since April 2012 and exceeded forecasts, sending traders flocking towards riskier assets on renewed optimism and away from the safe-haven dollar.
The euro rose 0.14% to $1.0591, recouping some of its losses from the previous session. Inflation in two of the euro zone’s biggest economies rose unexpectedly in February, data showed on Tuesday, pushing up rate hike expectations by the European Central Bank (ECB).
Sterling edged 0.22% higher to $1.2045, having surged 1% at the start of the week after Britain struck a post-Brexit Northern Ireland trade deal with the European Union. British Prime Minister Rishi Sunak was in Northern Ireland and then met with his own lawmakers on Tuesday to sell the new deal.
Against a basket of currencies, the U.S. dollar index fell 0.11% to 104.87. The index had risen nearly 3% in February, its first monthly gain after a four-month losing streak, as a slew of strong U.S. economic data in recent weeks raised market expectations that the Federal Reserve has further to go in hiking rates.